Daily Newsletter, Tuesday, 3/12/2019

Table of Contents

Market Wrap

Single Stock Pain

by Jim Brown

I pointed out recently that Boeing had contributed 2,681 Dow points since the recession lows.

Market Statistics

Boeing was up 391.54 points or 1,263% since March 9th, 2009 and that equated to roughly 2,681 Dow points over that period. The Dow is now suffering from the flipside of that Boeing gain. Over the last two days Boeing has erased roughly 320 Dow points. Fortunately, the other components took up some of the slack and the Dow is still up +104 for the week. Also working in our favor, unless there is some new revelation over the crashes or the plane, Boeing shares are not likely to crash any further. They may decline but the percentages should be a lot smaller.

The broader market tried to rally but the S&P came to a dead stop at 2,797.50 and just below round number resistance at 2,800. I suspect that is due to shorts trying to enter positions early before resistance is hit.

On the economic front the Consumer Price Index for February rose 0.2% and inline with expectations. This was the first gain in four months. This lifted the trailing 12-month inflation rate to 1.5%. The prices for both food and energy rose 0.4% and the largest gain since October. Gasoline prices rose 1.5% after having fallen -5.0% or more in each of the prior three months. The core CPI rose 2.1% on a year ago basis.

Medical care declined -1.0%, new car prices -0.2% and used car prices fell -0.7%. There is no immediate threat of a surge in inflation and this should keep the Fed on the sidelines for a long time.

The NFIB Small Business Optimism Survey for February rose slightly from 101.2 to 101.7 but remains well below the highs of 108.8 back in August. The China trade war, government shutdown and constant partisan bickering in the press, has been a cloud over optimism. Now that the 2020 campaigns have started the political attacks are only going to get worse.

Fortunately, the biggest gain by a component was a jump from 6% to 11% by those expecting the economy to improve. Those planning on increasing employment declined from 18% to 16% but those with current job openings rose from 35% to 37%. Those thinking now was a good time to expand rose from 20% to 22%. All the other components were either unchanged or moved only one point.

The minor gain in the headline number snapped a streak of five consecutive monthly declines. While this was not a report to celebrate there was also no reason to despair.

After the bell, the weekly API crude inventory showed a drop of 2.6 million barrels of oil and a 5.8 million barrel decline in gasoline inventories. Distillates rose 195,000 barrels.

Prices firmed over the last two days after Saudi Arabia said again it would do whatever it takes to stabilize prices. They pledged to limit exports in April at or below 7.0 million bpd, which would mean production of less than 10.0 mmbpd. This came after a massive multiday power outage in 20 of the 23 provinces in Venezuela. This outage shutdown oil production in the majority of the country and further crippled exports. Reportedly Venezuelan production has declined to about 900,000 bpd, down from 2.5 million bpd a year ago. This outage along with sanctions on Venezuelan crude has lifted prices on heavy sour crude to $3.75 above WTI. The spread between WTI and Mars US has narrowed to the smallest since 2011.

Chevron is setting on more than 4 million barrels of Venezuelan oil that it cannot sell and cannot purchase. The oil was loaded for shipment to Chevron before the sanctions and now it is stuck on tankers with no place to go. Venezuela is trying to make room for it onshore at the oil ports so they can offload it and stop the high rent on the tankers. Other companies are also holding millions of barrels of Venezuelan crude that they ordered but cannot complete the transactions. The tankers are anchored just outside the Venezuelan ports.

The inability to sell their oil plus the additional cuts by Saudi Arabia should continue to support prices. Memorial Day is normally a peak and oil prices have not even begun to rise in that direction yet but gasoline prices are already spiking.

Tomorrow we get the Producer Price Index for February. The rebound in fuel prices could have lifted prices at the producer level.

The new home sales on Thursday will be a key report because of housing's impact on the economy. Inventories are still low as we move into the spring selling season and mortgage rates are still low enough to not be a major drag.

The FOMC meeting next week is going to become the focus for the economic junkies even though the futures are pointing to zero percent chance of a hike.

The second major vote on the Brexit plan failed again today. The UK will vote again on Brexit on Wednesday and this vote would be to leave without a plan. That would be a hard Brexit and this vote is also expected to fail. If that vote fails, they will vote on extending the exit date from March 29th to some point in the future. That is expected to pass but the EU also gets a vote on any extension. This is going to keep a cloud over the market until the extension is passed and approved by the EU. A hard Brexit would be an economic disaster and that is the market's fear today even though there is little chance of it happening.

There are no material earnings reports for Wednesday but a full boat on Thursday. Adobe, Broadcom, Dollar General, Oracle and Ulta Beauty all report on Thursday.

There were only a couple of commonly known companies reporting on Tuesday. Dick's Sporting Goods (DKS) reported earnings of $1.22 that beat estimates for $1.06. Revenue of $2.49 billion barely beat estimates for $2.48 billion. Same store sales fell -2.2% on a 13-week basis but fell -3.7% on an unshifted calendar basis. Analysts were expecting a 3.3% decline. They guided for a return to "positive comps" in the second quarter.

For the full year they guided for $3.15-$3.35 and comp sales to be flat to +2%. Analysts were expecting $3.34 and sales up 0.5%. The company said it would no longer sell hunting rifles and ammunition in 125 more stores. They previously removed them from 10 stores after the Parkland Florida shootings. This was a factor in their weak revenue guidance because these are high dollar products. The company has 729 locations. Shares fell 11% on the news.

Chinese social video and online dating company Momo (MOMO) reported adjusted earnings of 53 cents that beat estimates for 52 cents. Revenue rose 50% to $559.1 million. They guided for Q1 revenue to rise 28-32% but would not provide guidance in dollar terms because of the recent currency volatility. Shares rose 12% on the news.

Last quarter Stitch Fix Inc (SFIX) was beaten up by analysts and investors because they said they were pulling back on marketing because they wanted a higher quality customer. They did not want every drive by shopper they could find because of the churn rate and expenses related to restocking the clothes these short-term customers sent back. Shares fell from $26 to $16. I said at the time I respected them for having the courage to do what was best for the company rather than what was best for analyst projections from quarter to quarter. They made the right choice.

They reported earnings of 12 cents, up from 2 cents, that beat estimates for 5 cents. Revenue rose 25% from $295.9 million to $370.3 million and beat estimates for $365 million. The company guided for current quarter revenue to rise 22% to 26% and full year revenue to rise 25% to 27%. Analysts were expecting earnings of a penny for the current quarter and revenue of $384 million. The company said active clients rose 18% to more than three million. Good job guys!

F5 Networks (FFIV) said it would acquire privately held NGINX Inc for $670 million. NGINIX is a software company in San Francisco that makes software for businesses upgrading from legacy applications. This software allows companies to upgrade without having to convert everything to new applications. Because of the acquisition F5 said it would see "low to single-digit growth" compared to prior guidance for "mid-to-high single-digit growth." They will pay for the acquisition with cash on hand and suspend their stock buyback program. Investors were not happy.

Tesla (TSLA) shares were volatile after the company reversed its decision to close its stores. The company said it had spent two weeks analyzing its decision and had decided that more stores will remain open than originally planned. In order to pay for the stores, the price of the cars would rise 3%, with the exception of the $35,000 Model 3. The price will increase on March 18th, but customers can still purchase at the old price until then.

Morgan Stanley cut its price target to $260 and slashed expected 2019 earnings from $4.17 to $1.30. Analyst Adam Jonas said the various moves by Tesla indicated an "air pocket" in demand. Jonas reduced his expected Q1 deliveries by 23% and cut the average transaction price to $53,000. He cut the 2020 earnings from $10.22 to $6.69.

He said the company was undergoing multiple transitions with sales momentum slowing, management changes and attempting to implement new products. Jonas said the 9-year old company will require a few more chapters before a long-term resolution of the Tesla story.

A week ago, Boeing was the market leader immune to potential tariff issues and making every investor wish they had bought it in December at $295. The 737 crash in Ethiopia was too similar to the 2018 Lion Air crash in Indonesia. Suddenly, Boeing appears to have been hit with what could be more than $1 billion in liabilities for a faulty plane. There were 157 people in the recent crash and 189 in the Lion Air crash. If the black boxes show that the flight software flew the planes into the ground, Boeing is in serious trouble.

All the major carriers with the exception of Southwest have grounded the planes. The EU and several other countries have now banned those planes from flying in their airspace. The 737 is Boeing's most successful plane with more than 350 delivered and nearly 5,000 on order.

There are two eyewitnesses that claimed the plane was trailing fire as it fell back to earth. If those witnesses prove reliable and the black boxes confirm the data this could be Boeing's get out of jail free card. If something other than the flight software caused the crash, then those 350 planes will be airborne again real soon.

Six witnesses said "smoke was billowing out behind" the plane while four witnesses described a very loud noise. "It was a loud rattling sound, like straining and shaking metal." Numerous witnesses who live in the flight path said they had never heard a plane make that kind of noise before. The noise caused them to look up and see the plane before it crashed. Other witnesses said "it was trailing white smoke and items like clothes and papers, some on fire, before the plane crashed 300 yards away from them. Other witnesses said it was trailing fire and sparks as it tried to turn. It will be very interesting to see what they get from the black boxes.

The challenge is that the plane flew straight into the ground nose first and exploded with a full load of fuel. What was not burned was buried in a 20 ft deep crater. One of the flight data recorders was damaged and may not provide any help in determining the cause.

Markets

We are in a period where there is little excitement for stocks. The big cap earnings on Thursday will be the only real excitement for the week. We are in the post earnings depression phase and still a week or two away from the start of planning for the Q1 earnings cycle. The indecision over the China trade deal, Brexit, Fed meeting and now the Boeing crash has put a damper on the market. If we move higher from here it could be a series of battles. If we move lower, it could be a buyable dip.

The S&P tried valiantly to reach 2,800 but could not make the stretch. The round number resistance is just the first step in attempting a higher high. As we saw over the last couple weeks the 2,815 level is actually the stronger level to watch.

The Dow posted a 96-point loss after a -167 point hit by Boeing. After yesterday's 200-point gain, I think this is remarkable. Normally when there is a major loss by a single stock the rest of the components tend to wilt in sympathy.

Apple and the rest of the tech contingent were a big help. UnitedHealth is trying to rebound back after the 35 point drop last week. Financials are also improving. Note that a several of the defensive stocks were on the losers list. That is encouraging.

The Dow is still about 650 points below the strong resistance at 26,191. That will be the major test for the market if the index can reach and/or exceed that level.

The Nasdaq has been fighting resistance at 7,600 for about three weeks. This index could be the first to break out and then lead the rest of the market higher. The decline last week was less than the rest and the rebound was sharper with a 2% gain on Monday. If the tech index were to suddenly surge higher, market sentiment could get a huge boost.

Small caps went nowhere today. Light resistance at 1,550 has held for the last two days. The 200-day at 1,585 is much stronger and still 35 points away. There is no excitement in the small cap space.

I am recommending caution until some of these headlines fade. The market likes to climb a wall of worry but too much worry can send it tumbling down to regroup. The Boeing news will pass, and Brexit will likely be extended. That brings the China trade talks back to front and center. The FOMC meeting next week will normally produce a positive market on Mon/Tue. Be patient, there is no rush to be invested.

New Option Plays

Resistance Holding

by Jim Brown

The S&P stalled again at 2,800 as negative headlines weakened sentiment. This level remains strong and it may take a new catalyst to propel the S&P back to 2,815 and the real resistance. The China talks appear to be dragging and buyers are starting to lose interest once again. On the positive side, the tech sector is rebounding in the face of Elizabeth Warren's call to break up the largest companies. However, given the strength of the rebound already this week the bullishness may fade.

New positions are only added on Wednesday and Saturday except in special circumstances. NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays

NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays

In Play Updates and Reviews

Passing Time

by Jim Brown

The markets were far less bullish today with Boeing sinking and Brexit vote failing. The Dow was volatile as each new ban of the 737 was announced. Boeing hit another low at $368 at 1:PM after the EU banned 737 flights. The headline stew weighed on the overall market, but Boeing was the biggest detractor. Boeing has suffered about the most damage possible from the bans so the stock declines should moderate. Tech stocks remained bullish but gave up some ground in the afternoon. The market is now passing time until the next two Brexit votes and the extension of the deadline.

Current Portfolio

Stop Loss Updates

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Profit Targets

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Current Position Changes

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Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.